Well, let’s start with the biggest disclaimer of all time: Should you tap into your home equity? No. The only reason you should tap into your home equity is if you have another investment that can produce a better return than your home.
What does a better investment mean? The four asset classes are real estate, business, paper assets (stocks), and commodities. Unless you can wisely diversify into these other assets, keep your money in your house. Let’s take a look at some examples.
Real Estate. Say you took out $100,000 from your home, you would have to find a significant real estate investment for that money to grow. Maybe a down payment on a commercial property or apartment building. In some regions of the US, you could buy a multi-family home free and clear. The idea is to buy an asset that puts money into your pocket.
Millennials, Homeownership, and Kids
Business. Every week I write business ideas and techniques. If you don’t know anything about business, don’t try to start a business. Opening a business and being an entrepreneur are two different things. The idea is to become an entrepreneur first, then create a business. If you plan to use the money to build an additional room in your residence to rent, it could be a great idea.
Paper Assets. Can you wisely invest $100,000 into the stock market? For me, it doesn’t have to perform better than your real estate property; the idea is that your money is diversified. $100,000 is a lot of money if you have no idea what you are doing in the stock market.
Commodities. I read a book on commodities, and trust me; you do not want to put your money directly into the commodities market. Should you spend $100,000 in gold and silver? It could be a great play, but it won’t produce you any income. Maybe you can buy an oil well? Super-expensive and you need to travel in the right circles. I would save commodities for investing once you are already rich.
Should I use home equity to pay off debt? No. If you haven’t learned to pay off your debt, getting an influx of money will not solve the problem. The problem is a lack of financial education and spending habits. Once those are solved, and you are on track, then perhaps home equity can speed along your positive progress.
Are You Too Old to Start a Business?
Why write an article on home equity if you say don’t use it? This article is a brain exercise. If you are sitting on $300,000 home equity, and you can safely tap $200,000, then start getting innovative. Start learning about business, real estate, and paper assets. It may take a year for you to get comfortable and come up with a game plan. Taking your time is okay, but more importantly, you are diversifying your income away from your home equity.
Most people brag about how much home equity they have accumulated. I personally just laugh. “My house has gone up 20%, and I have $200,000 in home equity.” So. What does that actually mean? How much is your house paying you each month? What are your options? The only options I see are selling your home and moving to a small place in the south. Oh, but you love living in great weather and near the beach? Tough luck. You need to find a way to tap into your home equity and add assets to your portfolio—assets that will pay you money.
If you can tap into your home equity and start buying assets that you put into an infinite return, you could become rich very quickly. You will need to understand the velocity of money.
Maximum Leverage 2: Buy Homes with Zero-Out-of-Pocket
What are some ways to tap into home equity? I am looking at three main ways to tap into your home equity. These are the mainstream ways, as I am sure other, riskier off-streams ways to leverage your home. I wouldn’t advise those. The three mainstream ways are cash-out refinance, home equity line of credit, and reverse mortgage.
Cash-out refinance. The cash-out refinance is probably the most notorious method out there. During the housing boom in the early/mid-2000s, people conducted cash-out refinances to buy liabilities like trucks, cars, ATVs, jet skis, RVs, and motorcycles. It was madness. I saw it first hand in San Diego in 2006.
The idea of the cash-out refinance is to lower your monthly bill while also taking out some of the extra equity. Sometimes, if you take out enough money, your home mortgage may go up. If you do it on a rental property, you may feel the sting in your monthly cash flow.
However, if you are creating more income, buying, purchasing, starting, or creating another asset, your overall cash flow will hopefully increase. Bottom line, you will need to know what you are exactly doing with the money, down to the last penny.
Buy Land, Start Farm
Home Equity Line of Credit. HELOCs are a great way to build assets over time. For example, If I plan to convert some of my spaces in my personal residence into rentals, I may choose to do a HELOC.
If I intended to convert my basement and add a Furnsied Room Over Garage (FROG), I might take a HELOC for, say, $40,000. I spend $40,000 on the basement. I make enough money from the basement to pay off the line of credit in two years, then I repeat for the FROG.
After the FROG, I now have two cash flow assets in an infinite return. Then I can use the HELOC to diversify into other assets such as business. The main takeaway is that you would not have to keep going back to the bank. Once you paid back the HELOC, you would still have access to the money again.
Reverse Mortgage. An older person can only perform a reverse mortgage. However, that doesn’t mean that savvy youngsters cannot leverage it. You would have to talk to presumably your parents.
Our Most Stressful Moments as Homeowners
If you all decide that passing the home down to you is not the best scenario, then a reverse mortgage may be a great way to leverage money now. The parents could stay in the home until they pass.
For example, if you all decide that the house is not a viable option, you can develop other investment ideas. Say you see a muti-family home for $300,000. It has four units. Your parents have four kids to think about for inheritance purposes. It may be better to perform a reverse mortgage now, buy the multi-family and each unit can be cash flow for the kids. Cash flow now, and the parents get to stay in the home until the end.
Conclusion. I know I make it sound easy, but you will have to conduct your own analysis. The main takeaway is that saying your home has gone up $300,000 doesn’t mean anything unless you know what to do with this money.
An investor always keeps their money moving into new assets; it’s called the velocity of money. Waiting and praying for your home to appreciate is a slow-moving game with no rewards. Go out and become a savvy investor and entrepreneur. Your bank account will thank you.
Here are some books I recommend, “20 (more) Books That Will Make You Rich”. Also, I would start with the “Rich Dad, Poor Dad” series of books. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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